Invoice Factoring Is Your Friend - An Overview for the CPA

While most entrepreneurs are in business to grow, that growth itself is often the greatest cash flow issue they have to deal with, especially during the first five to seven years of business. As a company grows, more and more assets are tied up in working capital as well as plant and/or facility costs. During these early years it is absolutely critical that small business owners have access to both short-term and long-term capital.

The Snowball Effect

According to the Harvard Business Review, it takes 40 to 60 cents on the dollar for the average small business to fund new business growth. That money is needed to fund the things that deplete the cash in any business:

1. Materials and/or Merchandise
2. Labor
3. Accounts Receivable

For example, if a business has a chance to grow $200,000 during the course of the next year, it will take $80,000 to $120,000 to support the cash flow (working capital) requirements.

The question is: Where is the money going to come from?

Two key mistakes that many fledgling businesses make involve short-term capital. The business owner often has a great concept, and maybe even a great business plan as well as experience in the industry. Still, however, most financial experts know that businesses fail because the owner has:

i) Failed to gain access to adequate short and long-term capital to accommodate growth
ii) Stripped off too much of the company revenue in the early years for personal use

So the challenge of the young business is to develop financial partners who can either invest or lend to the cause, and to control expenses as they grow. A young business is like a young tree. In the early years, the tree is more susceptible to environmental conditions such as drought, sunlight, and temperature fluctuations. The business is no different, impacted by market demand, economic conditions, regulatory conditions, etc. The more cash it has at its disposal, the better it will be able to weather any future interruptions.

When a young and emerging business needs cash to develop working capital, there are basically five places the owner can turn:

1) Personal liquidity
2) Family members
3) Outside investors
4) Banks

    Traditional operating lines
    Asset based line of credit
    Account purchasing programs

5) Invoice Factoring companies

If the business owner has tapped out his own resources, and does not want to give up control to an outside investor, he is likely to turn to a bank or factoring company. The good news is that in today's financial market competition is strong and technology offers multiple solutions for some banks to offer accounts receivable financing. Strong competition has also made way for very favorable rates from factoring companies.

Now the business can grow, but what about payables?

The right working capital solution should allow for business growth, but the long-term success of the business can be influenced by how the funds are utilized to affect day-to-day cash flow. Businesses should use the money for operations, yes, but they should also use it to enhance supplier relationships and reduce COGS.

Many if not most businesses today leave money on the table by failing to take supplier prompt pay and volume discounts. In many industries, these discounts can be as high as 3 - 5% of the material cost. In printing, for example, suppliers will often allow 5 - 6% discounts for cash payment on paper and ink purchases.

When considering their A/R financing solution, then, a business owner should ask these questions:

(1)What do my suppliers currently offer for prompt pay and/or volume purchases?
(2)How often am I currently taking advantage of those discounts?
(3)If I were to consistently pay within five days of purchase, could additional discounts be negotiated?
(4)What discount might be available to bring my current balance to zero?

Here are four basic benefits of accounts receivable finance to business operations:

Predictable and reliable cash flow: The business improves immediate cash flow as invoices are created and sold.

Increased sales: Flexible credit terms give the business a competitive edge in its marketplace. Predictable cash flow allows more sales to large but slower paying national clients.

Economy: The business may improve the management of its receivables with customized monthly reports such as aging, sales, and customer balances as well as trends.

Reduce debt and fund growth: The proceeds from the sale of accounts receivable can be used to pay off existing debt, take cash discounts on purchases, acquire inventory, or help facilitate capital improvements.

Any growing business needs to fund that growth. This demands more cash to cover materials, merchandise, labor and accounts that come with that growth. Today's businesses are seeking quicker and more secure ways to enhance their cash flow. Accounts receivable financing meets that need.

Businesses & Professionals that benefit from cash flow enhancement:

· Any company experiencing growth.
(AR Financing converts a frozen asset into cash that can be used to support growth.)

· Any company losing prompt payment discounts or volume discounts.
(Factoring effectively assists businesses in lowering their cost of goods and increasing margins.)

· Many companies are able to take on additional business from slower paying credit worthy customers, even large nationally known clients.

· Any company averse to debt and wanting to grow on its own assets.
(AR Funding effectively puts the company on a "cash basis.")

· Any company wanting to concentrate on its business rather than on money management.
(Invoice Factoring gets the company out of the banking business.)

· Young companies that are growing but restricted by their cash flow and borrowing limits.

· Any company about to hire someone to work slow-paying receivables.
(AR Financing avoids or reduces the hassles and cost of hiring and managing personnel.)

· Any company in need of computerization or managing accounts with a manual or inefficient system.
(Accounts Receivable Funding avoids or reduces hardware, software, conversion, and personnel costs).

Article Source: Lucie Minor


  1. If your net income plus the increase in variable liabilities equals or exceeds the increase in variable assets, the company has the resources to finance itself. If not, you must bring in additional debt or equity. Use your current balance sheet to determine the various asset and liability accounts in your business.

  2. I appreciate this! I've been trying to figure out what this whole factoring thing is about. I've been looking around and found this to be very helpful. Thanks for sharing!

  3. Yeah, today's businesses really need invoice factoring companies, to improve their cash flow.

  4. I just learned about factoring last week. Seems like an awesome business move.

  5. I really like the blog and this post is really informaitonal. If you want more ingormation I found a great factoring site, if anyone is interested in it let me know.

  6. I have been looking into factoring for small businesses and have been struggling with finding information. Do you know what receivables are? I am needing someone more knowledgeable then me to help me out.

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